• 2Q14 DPU +8.1% YoY
• Ex-dividend date on 21 Jul 2014
• Downgrade to HOLD on valuation grounds

2Q14 results within our expectations

First REIT (FREIT) reported a 14.5% YoY increase in its 2Q14 gross revenue to S$23.0m, driven largely by contribution from its three new hospitals. Distributable amount to unitholders and DPU increased by 13.6% and 8.1% YoY to S$14.4m and 2.00 S cents (ex-dividend on 21 Jul 2014), respectively. The latter was FREIT’s highest achieved DPU since its listing in Dec 2006. For 1H14, revenue and DPU grew 20.9% and 11.1% to S$45.5m and 3.99 S cents, forming 48.8% and 48.1% of our FY14 forecasts, respectively. This was within our expectations as we expect a full quarter of contribution to come in from its recently completed acquisition, Siloam Hospitals Purwakarta (SHPW), in 3Q14. Looking ahead, FREIT does not expect the result of the Indonesian presidential elections to impact the healthcare industry in the short to medium term. This is because both presidential candidates have highlighted their support for universal healthcare coverage.

Positive action to lock in interest rates

Management has recognised the risk of future interest rate spikes and has acted promptly to address this issue. It recently secured a S$165m Transferable Term Loan Facility (TLF) which allows it to refinance its outstanding floating rate loans to a fixed rate basis at an all-in cost of ~3.7%-3.8%. Its debt maturity will also be stretched from 2016 to 2017-2019. Following this refinancing exercise and excluding a S$26.5m bridge loan used to finance its SHPW acquisition (which will in turn be refinanced by 4Q14 into a fixed rate loan), FREIT will not have any refinancing needs until 2017. All its debt will also be on a fixed-rate basis. This provides stability to its unitholders.

Had a good run; downgrade to HOLD

FREIT’s share price has appreciated 16.0% YTD and 18.8% since we upgraded it to a ‘Buy’ on 16 Sep 2013. With the stock trading at 1.3x FY14F and FY15F P/B, we believe valuations are now unexciting, although the stock still offers a decent FY14F and FY15F dividend yield of 6.7% and 7.0%, respectively. Given the limited upside potential return, we downgrade the stock to HOLD, with an unchanged fair value estimate of S$1.21.

Source: OCBC Research - 17 Jul 2014